NAIFA President testifies on proposed DOL Fiduciary Rule; NAFA leader also speaks out against it

Published 08/12/2015

In testimony before the Employee Benefits Security Administration of the Department of Labor on Tuesday, NAIFA President Juli McNeely told the panel that the proposed fiduciary rule is unworkable because it could harm the advisor-client relationship and hinder access to affordable advice to smaller- and mid-market consumers and businesses.

McNeely testified on behalf of NAIFA’s 40,000 members who primarily serve smaller markets. As a small business owner in Spencer, Wis., McNeely said her practice comprises three support staff and three other advisors, with 52 small-business owners, all of which employ 25 employees or less. Of McNeely’s 484 individual clients, the average account size is about $71,000. NAIFA has long stated that the DOL rule, as proposed, could force many NAIFA members to reduce services to these smaller individuals and businesses.

“The key to my practice is to focus on creating new savers,” regardless of their account size, McNeely said. “It’s important that advice is given to all individuals…I believe this proposal would result in lower savings over time, and I know that’s not what the Department intends.”

McNeely addressed three topics concerning the DOL rule that she said would hinder advice (seeNAIFA’s comments to DOL): 1) the impact the rule could have on compensation models (fee v. commission); 2) the potential costs to retirement savers should the DOL rule move forward as is; and 3) the Best Interest Contract exemption, which would require consumers to sign a complicated contract prior to receiving advice.

While McNeely’s practice operates under both fee- and commission-based compensation models, McNeely said she believes that fee-based advisors would “win” under the current proposal because their clients are accustomed to paying fees for service. Surveys show that most NAIFA members’ clients prefer the commission-based model and would not be able to afford costly fees. In addition, McNeely said, most fee-based advisors would not consider serving smaller-market accounts. “My minimum investment is $50,000 to work with a client, and many are under that threshold… Everyone should have a choice on how they compensate their advisor.”

In testimony from Dr. Jennifer Knoll, McNeely’s client, Dr. Knoll said she is “very comfortable with the compensation arrangement Juli and I have. I know she puts my best interests first.”

McNeely also told the panel that the DOL proposed rule would result in the loss of advice to consumers. For example, clients who change jobs turn to McNeely for advice on their 401ks, many of which have balances as low as $5,000. “Many don’t know what to do with the account and it could be a daunting process if you are not familiar with what is available” for 401k rollovers. McNeely is concerned that without advice, many investors would cash out their 401k and be subjected to taxes and penalties, resulting in a loss of retirement savings.

McNeely closed her testimony with concerns about the Best Interest Contract exemption. Under the DOL proposal, advisors could continue to serve clients under commission if clients agree to sign a complicated, confusing and costly contract. The Best Interest Contract is burdensome and unworkable in the real world of middle- and lower-income retirement investors, McNeely said.

In the question-and-answer session, McNeely was asked about the role annuities have in retirement savings. McNeely told the panel there is “a strong purpose” for annuities in any retirement plan because of the lifetime guarantee, “especially for those who have not had the ability to put huge sums away” throughout the career.

• See NAIFA's concerns and recommendations on the proposed rule in a new video and infographic.

Public hearings on the proposed rule started on Monday and continue through Thursday, Aug. 13. More than 400 groups have asked to participate in the hearings.